· UCC Article I: (Intro to UCC)
· When does 1-201 apply?
o This article applies to a transaction if it is governed by another article of the UCC. Article I only applies if you find another transaction governed by another article.
· (a) UCC liberally construed and applied to promote purposes and policies: (1) Simplify, clarify, and modernize the law governing commercial transactions; (2) Permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) Make uniform laws of jurisdictions; .(b) Unless changed by UCC, law of equity, including that applicable to K, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy shall supplement the code.
· The definitions sections under article 1 apply, unless they are trumped by another section’s definitions. If none, you can rely on 1-201. (e.g. good faith)
· “Good Faith” (except under Article 5) means honest in fact and observance of reasonable commercial standards of fair dealing.
· (a) Except as otherwise provided in (b) or elsewhere, provisions may be varied by agreement; (b) good faith diligence, reasonableness, and care may not be disclaimed, but agreement can be made as to their measurement, unless unreasonable. Reasonable amount of time may be measured by agreement, but must not be unreasonable.
· Every K or duty w/in imposes obligation of good faith in its performance and enforcement.
I. Negotiable Instruments & Article 1
· 3-102 and Scope Provision for NI’s.This article applies to NI’s. It does not apply to money, payment orders governed by 4A, or to securities governed by Article 8.
· What are the two forms of NI’s?
o (a) Promissory Note 2 party instrument that is comprised of a promise to pay. (e.g. student loan; mortgage; car);
o (b) Check: three party instrument which consists of (1) drawer (you); (2) drawee (bank); (3) and a payee.
· What does a check do and what does a note do?
o A check promises to pay; and a check orders a party to pay.
· What is a check drawn on oneself called?
o A cashier’s check. (same person is drawer and drawee).
· 3-103(a)(4) Drawee. “Drawee” means a person ordered in a draft to make payment.
· 3-103(a)(5) Drawer. 6. “Drawer” means a person who signs or identified in a draft as a person ordering payment.
· 3-103(a)(7) Maker “Maker” is a person who signs or is identified in a note as a person undertaking to pay.
1-104(a) Negotiable Instrument
(a) A negotiable instrument means: (all of the following-conjunctive (and) not disjunctive (or)).
1. A writing 2. A signature 3. A promise or order (at time it comes into possession of a holder)
5. Pay Money 6. Fixed Amount
7. Must be payable to bearer or order 8. Payable on demand or at a definite time
9. No other undertakings.
· 1-201(43) Writing is a printing, typewriting, or any other intentional reduction to tangible form.
· 1-201(37) Using any symbol executed or adopted w/present intention to adopt or accept a writing.
· 3-103(8) Order is written instruction to pay money signed by the person giving the instruction. The instruction may to be to any person, including himself, or one or more persons jointly, or in the alternative. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.
· 3-103(12) Promise is a written undertaking to pay money signed by the person undertaking to pay. An acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation.
· 1-201(24) . Money is a medium of exchange currently authorized or adopted by a domestic or foreign gov’t. It also means an established monetary unit of account established by an intergovernmental organization or b/en two or more countries.
· What is the key focus of Emerson v. Zagurski?
o You have to determine what article governs your transaction, b/c there could be some variances. In Zagurski, the parties discovered that an NI under article 3, which applied, had a 6 year SOL, while a K only had a 5 year SOL.
Words of Negotiation (requirement 7)
· What sections apply to words of negotiation?
o §3-104(a) the seventh requirement; and §3-109 which defines bearer and order.
· What do the words of negotiation tell you?
o They tell you who can indorse the instrument, bearer or a specific individual.
· What is the distinction b/en payable to bearer or payable to order?
o If payable to bearer, you do not have to have indorsement to transfer. If payable to order, you have to have indorsement of the payee to transfer.
(a) A promise or order is payable to bearer if it:
(1) States that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;
(2) Does not state a payee; or
(3) States that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.
(b) A promise or order not payable to bearer is payable to order if it is payable (i) to the order of an identified person; or (ii) to an identified person or order.  A promise or order that is payable to order is payable to the identified person.
Problems 1-1 (Just looking at words of negotiability, which tells you who can indorse!)
· IOU-I promise to pay X $500 on March 1, 2002.
o (a) This is not payable to bearer b/c (1) it does not state that it is payable to bearer or to the order of bearer (or person in possession); (2) it states a payee, X; (3) does not state that it is payable to or to the order of cash. (b) No fit under (b) Not payable to order b/c no state that it is payable to the order of X; or no state that payable to X or order. Thus, this is not a NI under 3-104 b/c fails #7.
· I promise to pay to Tom Jones or bearer.
o This is payable to bearer.
· I promise to pay to the order of Tom Jones or bearer.
o This is payable to bearer for several reasons: (1) under statute it can only be payable to order if not payable to bearer; (2) tie goes to the means of easier negotiability, a common theme. (bearer easier transfer, b/c no need indorsement).
· I hereby order X to pay blank.
o This is payable to bearer under 3-109(a), b/c it fails to state a payee, and thus, it cannot be payable to order. It falls under 3-109(a)(2) b/c it “does not state a payee.”
· IOU 500.00.
o The key is that IOU is just an acknowledgement, so this would fall outside of a promise/order, but it fails to state a payee, and thus would likely be payable to bearer. 3-109(a)(3).
(a) (1) The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. (2) The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person. (3) If more than one person signs in the name or behalf of the issuer of an instrument, and all the signers do not intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.
(d) (1) If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged or enforced by any or all of them in possession of the instrument. (2) If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. (3) If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.
Pay to the order of Tom or Mary Jones.
This uses the disjunctive “or” so it is an alternative means of payment. Thus, under 3-110(d) and payable to negotiable (indorsable) by any or all of them in possession.
Pay to the order of Tom and Mary Jones.
This is “conjunctive” which means that they must be indorsed by all of them to negotiate, discharge, or enforce. 3-110(d)
Pay to the order of Tom Jones and/or Mary Jones.
This is ambiguous as to whether it refers to alternative payment or not alternative. Thus, under 3110(d), the tie goes to the easier means of negotiability, i.e. alternative payment. Either party may indorse to make it negotiable, discharged, or enforceable.
Pay to the order of Tom Jones
(a) Suppose the maker intended the payee to Jones, but not the Tom Jones who indorsed and transferred the instrument?
You have to look at the intent of the maker/drawer of the instrument. The payee is the Tom Jones intended. The other Tom Jones has forged the instrument. 3-110(a).
(b) Suppose the maker made the instrument payable to Tom.
The instrument is payable to Perry Jones, regardless of the fact that it was made out to the wrong name, b/c it is the maker’s intent that counts. It may be indorsed with the name “Tom Jones”; “Perry Jones” or both. 3-110(d).
(a) Except as provided in this section, a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another record, or (iii) that rights or obligations w/respect to the promise or order are stated in another record. A reference to another record does not of itself make the promise or order conditional.
(b) A promise or order is not made conditional (i) by a reference to another record for a statement of rights w/respect to collateral, prepayment, or acceleration, or (ii) b/c payment is limited to a particular fund or source.
Unconditional Promise to Pay
1. 3-106(a) & (b)
o “I promise to pay 100K to the order of John Doe if he conveys title to Blackacre to me.” The promise is expressly conditioned upon John’s conveyance of B/A, and thus, it is conditional and not a NI. (this violates 3-106(a)).
o “This note is subject to a K of sale dated x b/en payee and maker of this note.” This violates 3-106(a)(ii), b/c it is subject to another record.
o “Rights and obligations of the parties with respect to this note are stated in an agreement dated x b/en the parties.” This violates 3-106(a)(iii).
o “This note is secured by a security interest in collateral described in a security agreement dated April 1, 1990 b/en the payee and maker of this note.” Under 3-106(b)(i) this reference to being subject to a separate document dictating conditions of collateral is OK, and no makes it conditional.
o This note is payable provided or subject to their being funds in XYZ account? This is OK under 3-106(b)(ii).
o What does acceleration mean? Gives holder the right to receive all amounts due under the note immediately, regardless of the other terms. (judgment).
o What does prepayment mean? This is the right of the Maker of the instrument to pay off the note in advance of when it is due under the note.
o What is the policy for not being subject to another record? It impedes negotiability if you are required to look at another record to see how valuable the agreement is.
1.”IOU (john) 500.00. Due March 1, 2001. Negotiable.” This is not negotiable for two reasons. First, under 3-103(12) it is not a promise, but a mere acknowledgment of an obligation does not make a promise w/o an undertaking. Here there was none. Also, there are no words of negotiability under 3-109, b/c it identif
mediately due and payable at earlier date if uncle dies.” This Ok per 3-108(b), b/c it has an acceleration clause, which is OK, b/c benefits the holder.
The note says payable for 25K, how much loan will he get?
Not much b/c no interest.
“I promise to pay 25K to the order of Paradise Nat’l Bank on July 1, 2001, with the option to extend payment to six weeks after the death of uncle Fred.” Fred dies in 2002.
This violates 3-108(b)(iv) b/c the extension clause, although pursuant to a specified extension does not further a definite time.
Problem 1-8 Eskine purchases mining equipment and executes PN w/Gibson, seller. Note requires payment in installments. Gibson discounted note to Bank. Equipment turned out to be defective and Erskine stopped payments. “If any installment is not paid when due and/or if the security agreement securing this note is breached in any respect, then this note shall immediately b/come due at the holder’s option w/o demand or notice.” Cognovit: SA referred to note statement, stating that the holder can confess judgment and stated that whenever deemed indebtedness, it could elect to acceleration. (1) Acceleration clause renders time uncertain; (2) Acceleration clause renders promise conditional; (3) “deemed in security clause destroys negotiability?”
Is the note negotiable?
The acceleration clause is OK pursuant to 3-108(b); Cognovit no destroy negotiability by making it conditional, b/c can be subject to acceleration.
Does Cognovit clause constitute an add’l undertaking by Erskine that destroys negotiability? 3-104(a)(3).
No, under 3-104(a)(3), there is no violation b/c the undertaking is to confess judgment, which is covered by 3-104(3).
Courier W/O Luggage: “No Other Add’l Undertakings”
3-104(a)(3) [A NI may not] state any other undertaking or by the person promising or ordering payment beyond payment of money, except (i) an undertaking/power to give, maintain, or protect collateral to secure payment, (ii) an authorization/power to the holder to confess judgment or realize on/dispose of collateral, or (iii) a waiver of law intended to benefit or protect of the obligor.
Who does the no add’l undertaking requirement apply to?
It only applies to the person ordering or promising to pay.
“I promise to pay to the order of X and then to wash his car.” Is this Ok under 3-104(a)(3)?
No, this would be the type of undertaking that would keep this from being a NI.
What would (i) (give, maintain, or protect collateral to secure payment apply to?
Undertaking to provide collateral in the form of a deed of trust etc…
What is (ii) (authorization/power to confess judgment or realize/dispose on collateral) commonly referred to?
A cognovit clause. They are unenforceable in many States b/c against PP. It basically appoints the other party as attorney and confesses.
What would be an example of a permissible undertaking with respect to (iii) (waiver of law intended to benefit or protect the promisor)?
Waiver of right to presentment or demand.
Problem: Nam K’d with Puckett to build windows. Puckett did work and charged Nam for 45 hours. Nam calculate his own hours and found that only worked 29 hours. Nam paid Puckett w/check for the 29 hours. In the check, he wrote “Your signature evidences full satisfaction.” He also included letter to the same effect. “Your signature on the check will constitute your agreement that the check is payment in full of your bill.” Puckett wrote on check that not satisfactory as full payment and cashed.
Is this a NI?
Yes, the only obstacle would be the conditional aspect of the payment. However, this concept of accord and satisfaction is encouraged, and thus, it is not taken out of Article 3. 3-311. No excess baggage either.
Is puckett entitled to the remainder of his bill?
No, his recovery would be barred under 3-311. This is an accord and satisfaction agreement, and his tendering of the check discharges the claim.
 Cross 1-201(20).
 Example: UPS is good faith delivery.
 Cross 1-201(20). Also Cross 1-302, which establishes that “good faith” may not be waived.
 Definition of NI’s is found under §3-104(a).
 3-109 governs bearer and order definition.
 Think of the IOU example as not being enough to be a promise or order.
 This is a literal requirement, unless you can show that it indicates that the person in possession of promise or order is entitled to payment.
 This is also a literal requirement.
 The key to these distinctions is that: (order-person) or (person-or order).
 The key is that the future event must be more than a certainty. It must be determinable upon issuance.
 This add’l undertaking only applies to the maker, not the payee.